A not-so-great idea

Lately I have heard a lot of talk about cash: some advisors recommending holding aside 35-50% in cash until the Europe debt issue blows over (it’s been in full swing for nearly 2 years now); a few say that the market has had a good run up over the last couple of years and now maybe it is time to go to cash and wait until it falls again – I even today had someone tell me he had already done this in his 401k. I have strong feelings about this and could talk all day, but I think it would be best to simply quote from the vault that I sent out exactly three years ago next week, when the S&P 500 was at 825 – it has since gone up by over 59%:

Financial markets are leading indicators that anticipate economic recovery and are likely to turn decidedly positive months before the economy recovers. Until that time, volatility in the markets is likely to continue, posing a corrosive effect to staying the course toward achieving your financial goals. In our view, however, while holding a large amount of cash right now might feel good against such an uncertain backdrop, it is not a good way to achieve your longer-term objectives. Unless you can perfectly time the entry back into the markets, for long-term success, an appropriate asset allocation that addresses your financial goals, risk and diversification is a crucial aspect of wealth management. Broadly diversifying your portfolio across asset classes and globally may help to mitigate volatility risk in the near-term, and keep you on track toward pursuing longer-term wealth management goals. To that end, now may be an opportune time to review your overall plan with your advisor to ensure that your portfolio is appropriately positioned and diversified to help attain your long-term financial goals.

What do the next 3 years hold? I don’t know. But waiting for the right day isn’t going to do any good. The old cliché holds true: it’s not timing the market, it’s time in the market. Note that nowhere did this say “all stocks” or anything like that. You should be in an appropriate asset allocation that addresses YOUR financial goals, and you must maintain that allocation through rebalancing. For some that means a high percentage of stocks in all sectors and worldwide; for others that means a portfolio of short and intermediate term domestic and global bonds. In any case, diversification of the portfolio is key, and cash isn’t just non-diversified, it’s a losing proposition when you consider inflation, management fees, and opportunity cost.